SEATTLE, July 26, 2022 (GLOBE NEWSWIRE) -- Sound Financial Bancorp, Inc. (NASDAQ:SFBC), the holding company (the "Company") for Sound Community Bank (the "Bank"), today reported net income of $1.6 million for the quarter ended June 30, 2022, or $0.61 diluted earnings per share, as compared to net income of $1.7 million, or $0.65 diluted earnings per share for the quarter ended March 31, 2022, and $2.3 million, or $0.85 diluted earnings per share for the quarter ended June 30, 2021. The Company also announced today that the Board of Directors has declared a cash dividend on Company common stock of $0.17 per share, payable on August 23, 2022 to stockholders of record as of the close of business on August 9, 2022.
Comments from the President and Chief Executive Officer
"Our quarterly loan growth of $96.6 million, or 13.6% over the prior quarter, was funded with our excess liquidity and returned our balance sheet composition and loan to deposit ratios to pre-pandemic levels," remarked Ms. Stewart, President and Chief Executive Officer. "The result was a significant increase in net interest income quarter over quarter and an improved net interest margin. While economic headwinds appear on the horizon, our credit quality remains sound and we repositioned staff to originate and manage our portfolio loan growth," concluded Stewart.
Q2 2022 Financial Performance
Total assets decreased $21.9 million or 2.3% to $937.0 million at June 30, 2022, from $958.9 million at March 31, 2022, and increased $13.8 million or 1.5% from $923.2 million at June 30, 2021.				Net interest income increased $774 thousand or 10.2% to $8.4 million for the quarter ended June 30, 2022, from $7.6 million for the quarter ended March 31, 2022, and increased $1.0 million or 14.2% from $7.4 million for the quarter ended June 30, 2021.

				Net interest margin ("NIM"), annualized, was 3.83% for the quarter ended June 30, 2022, compared to 3.49% for the quarter ended March 31, 2022 and 3.36% for the quarter ended June 30, 2021.
Loans held-for-sale decreased $1.2 million or 92.3% to $100 thousand at June 30, 2022, compared to $1.3 million at March 31, 2022 and decreased $3.6 million or 97.3% from $3.7 million at June 30, 2021.
				A $600 thousand provision for loan losses was recorded for the quarter ended June 30, 2022, compared to $125 thousand provision for loan losses for the quarter ended March 31, 2022 and $250 thousand for the quarter ended June 30, 2021. The allowance for loan losses to total nonperforming loans was 157.85% and to total loans was 0.88% at June 30, 2022.
Loans held-for-portfolio increased $96.6 million or 13.6% to $806.1 million at June 30, 2022, compared to $709.5 million at March 31, 2022, and increased $166.4 million or 26.0% from $639.6 million at June 30, 2021. Paycheck Protection Program ("PPP") loans totaled $429 thousand at June 30, 2022, compared to $2.1 million at March 31, 2022 and $36.0 million at June 30, 2021.

				Net gain on sale of loans was $84 thousand for the quarter ended June 30, 2022, compared to $365 thousand for the quarter ended March 31, 2022 and $1.1 million for the quarter ended June 30, 2021.
Total deposits decreased $50.1 million or 6.0% to $786.0 million at June 30, 2022, from $836.1 million at March 31, 2022, and decreased $18.7 million or 2.3% from $804.7 million at June 30, 2021. Noninterest-bearing deposits decreased $22.2 million or 10.6% to $186.6 million at June 30, 2022 compared to $208.8 million at March 31, 2022, and increased $4.8 million or 2.6% compared to $181.8 million at June 30, 2021.
				The Bank continued to maintain capital levels in excess of regulatory requirements and was categorized as "well-capitalized" at June 30, 2022.

Operating Results

Net interest income increased $774 thousand, or 10.2%, to $8.4 million for the quarter ended June 30, 2022, compared to $7.6 million for the quarter ended March 31, 2022 and increased $1.0 million, or 14.2%, from $7.4 million for the quarter ended June 30, 2021. The increase from the prior quarter was primarily the result of higher interest income earned on loans and investments and interest-bearing cash. The increase from the same quarter last year was primarily the result of lower interest expense paid on deposits and higher interest income earned on loans, investments and interest-bearing cash.

Interest income increased $773 thousand, or 9.4%, to $9.0 million for the quarter ended June 30, 2022, compared to $8.2 million for the quarter ended March 31, 2022 and increased $571 thousand, or 6.8%, from $8.4 million for the quarter ended June 30, 2021. The increase from the prior quarter was primarily due to higher average loan balances and a 55 basis point rate increase in average yield on investments and interest-bearing cash following recent increases in the targeted federal funds rate, partially offset by lower average investments and interest-bearing cash balances. The increase in interest income from the same quarter last year was due primarily to higher average loan balances and a 66 basis point increase in average yield on investments and interest-bearing cash, partially offset by a 60 basis point decline in the average loan yield and lower average investments and interest-bearing cash balances.

Interest income on loans increased $622 thousand, or 7.7%, to $8.7 million for the quarter ended June 30, 2022, compared to $8.1 million for the quarter ended March 31, 2022, and increased $398 thousand, or 4.8%, from $8.3 million for the quarter ended June 30, 2021. The average balance of total loans was $741.6 million for the quarter ended June 30, 2022, compared to $694.9 million for the quarter ended March 31, 2022 and $628.1 million for the quarter ended June 30, 2021. The average yield on total loans was 4.70% for the quarter ended June 30, 2022, compared to 4.71% for the quarter ended March 31, 2022 and 5.30% for the quarter ended June 30, 2021. The slight decline in the average yield on loans during the current quarter compared to the prior quarter primarily was due to lower recognition of net deferred fees due to a reduced volume of PPP loan repayments from U.S. Small Business Administration's ("SBA") loan forgiveness, and new loan originations at lower rates, primarily related to fixed rate mortgage loans. The decrease in the average yield on loans during the current quarter compared to the same quarter in 2021 was primarily due to the decrease in the recognition of net deferred fees due to loan repayments from SBA loan forgiveness. The Bank recognized $40 thousand, $98 thousand, and $1.0 million in deferred fees and interest income related to PPP loan forgiveness repayments during the three months ended June 30, 2022, March 31, 2022, and June 30, 2021, respectively. Refer to the discussion below for the impact of PPP on our net interest margin. As of June 30, 2022, total unrecognized fees on PPP loans were $23 thousand. Interest income on investments and interest-bearing cash increased $151 thousand to $289 thousand for the quarter ended June 30, 2022, compared to $138 thousand for the quarter ended March 31, 2022, and increased $173 thousand from $116 thousand for the quarter ended June 30, 2021. This increase compared to the same quarter one year ago was due to a higher average yield for investments and interest-bearing cash, partially offset by lower average balances.

Interest expense remained virtually unchanged at $594 thousand for the quarter ended June 30, 2022, compared to $595 thousand for the quarter ended March 31, 2022, and decreased $470 thousand, or 44.2%, from $1.1 million for the quarter ended June 30, 2021. The decrease in interest expense during the current quarter from the comparable period a year ago was primarily the result of a 24 basis point decline in the average cost of total deposits (including non-interest bearing deposits) reflecting reduced rates paid on all interest-bearing deposits, partially offset by a $55.8 million, or 12.4%, increase in the average balance of interest-bearing deposits other than certificate accounts. Contributing further to this decrease was a $78.8 million, or 45.1%, decline in the average balance of higher costing certificate accounts. In addition, total deposit costs were negatively impacted by the $1.7 million decrease in the average balance of noninterest bearing deposits to $192.8 million for the three months ended June 30, 2022, compared to $194.6 million for the three months ended March 31, 2022, and favorably impacted by the $13.2 million increase in average balance of noninterest bearing deposits from the same period last year. The average cost of total borrowings, including subordinated notes and borrowings, decreased to 5.13% for the quarter ended June 30, 2022, from 5.85% for the quarter ended March 31, 2022, and decreased from 5.81% for the quarter ended June 30, 2021.

Net interest margin (annualized) was 3.83% for the quarter ended June 30, 2022, compared to 3.49% for the quarter ended March 31, 2022 and 3.36% for the quarter ended June 30, 2021. The increase in net interest margin from the prior quarter and the same quarter a year ago was primarily due to the higher interest income earned on interest-earning assets, driven by the higher average balance of loans and the higher average yield earned on investments and interest-bearing cash and, with respect to the same quarter a year ago, the decline in rates paid on interest-bearing liabilities. During the second quarter of 2022, the average yield earned on PPP loans, including the recognition of the net deferred fees for PPP loans repaid and forgiven by the SBA, resulted in a positive impact to the net interest margin of one basis point, compared to a positive impact of three basis points during the quarter ended March 31, 2022, and a positive impact of 24 basis points during the quarter ended June 30, 2021.

The Company recorded a provision for loan losses of $600 thousand for the quarter ended June 30, 2022, as compared to $125 thousand for the quarter ended March 31, 2022 and $250 thousand for the quarter ended June 30, 2021. The increase in the provision for loan losses for the quarter ended June 30, 2022 compared to the quarter ended March 31, 2022 resulted primarily from the growth in our loans held-for-portfolio, partially offset by a shift in the loan portfolio composition to loan types requiring a lower general loan allowance as balances of lower risk one-to-four family loans and multifamily residential loans increased, thereby reducing the related general loan allowance. The provision for loan losses in the second quarter of 2022 also reflects the inherent uncertainty related to the economic environment as a result of local, national and global events.

Noninterest income decreased $508 thousand, or 33.4%, to $1.0 million for the quarter ended June 30, 2022, compared to $1.5 million for the quarter ended March 31, 2022 and decreased $697 thousand, or 40.7%, from $1.7 million for the quarter ended June 30, 2021. The decreased noninterest income for the three months ended June 30, 2022 as compared to the three months ended March 31, 2022, primarily resulted from a $211 thousand decline in the fair value adjustment on mortgage servicing rights primarily due to a smaller servicing portfolio, and a $281 thousand decrease in the net gain on sale of loans as a result of decreased refinance activity over the past quarter, partially offset by a $47 thousand increase in service fees and income primarily resulting from higher commercial loan fees and consumer deposit activity fees as businesses continued to reopen in our market areas. The decrease in noninterest income from the comparable period in 2021 primarily was due to a $979 thousand decrease in net gain on sale of loans as a result of a decline in both the amount of loans originated for sale and gross margins for loans sold, partially offset by a $351 thousand increase in the fair value adjustment on mortgage servicing rights due primarily from the effects of recent higher market interest rates causing a reduction in prepayment speeds, a $131 thousand decline to a $35 thousand loss on cash surrender value of bank-owned life insurance ("BOLI"), and a $70 thousand increase in service fees and income primarily resulting from higher commercial loan fees and consumer deposit activity fees. Loans sold during the quarter ended June 30, 2022, totaled $2.9 million, compared to $12.2 million and $39.9 million during the quarters ended March 31, 2022 and June 30, 2021, respectively.

Noninterest expense decreased $51 thousand, or 0.7%, to $6.8 million for the quarter ended June 30, 2022, compared to $6.8 million for the quarter ended March 31, 2022 and increased $796 thousand, or 13.3%, from $6.0 million for the quarter ended June 30, 2021. The decrease from the quarter ended March 31, 2022 was a result of a decrease in salaries and benefits expense of $198 thousand due to higher costs typically incurred in the first quarter from the impact of annual wage and stock compensation increases, partially offset by an increase in operations expense of $114 thousand primarily due to increases in various expenses including marketing and charitable expenses, insurance costs, and professional fees. The increase in noninterest expense compared to the quarter ended June 30, 2021 was primarily due to an increase in salaries and benefits of $655 thousand primarily due to higher wages and incentive compensation, higher medical expenses and lower deferred compensation, partially offset by a decrease in commission expense related to a decline in mortgage originations. Operations expense increased $67 thousand compared to the quarter ended June 30, 2021 due to increases in various accounts including marketing and travel expenses, legal fees associated with higher commercial loan volume, and debit card processing, partially offset by lower loan origination costs due to lower mortgage origination volume.

The efficiency ratio for the quarter ended June 30, 2022 was 72.12%, compared to 74.77% for the quarter ended March 31, 2022 and 66.07% for the quarter ended June 30, 2021. The improvement in the efficiency ratio for the current quarter compared to the prior quarter is primarily due to higher net interest income from an increase in average balance of loans held-for-portfolio and a higher rate earned on reserve balances, and lower noninterest expense from reduced salaries and benefits costs, partially offset by lower noninterest income primarily as a result of lower gain on sale of loans from mortgage banking and a decline in the fair value adjustment on mortgage servicing rights. The weakening in the efficiency ratio for the current quarter compared to the same period in the prior year is primarily due to higher noninterest expense related to increased salaries and benefits and lower noninterest income primarily due to lower gain on sale of loans from mortgage bank, partially offset by higher net interest income primarily as a result of a higher average balance of loans held-for-portfolio at higher yields than prior investments and a reduction in rate paid on interest bearing deposits.

Balance Sheet Review, Capital Management and Credit Quality

Assets at June 30, 2022 totaled $937.0 million, compared to $958.9 million at March 31, 2022 and $923.2 million at June 30, 2021. The decrease in assets from the sequential quarter was primarily due to decreases in cash and cash equivalents, which primarily was funded by a $50.1 million reduction in deposits, and a $30.0 million increase in Federal Home Loan Bank ("FHLB") advances, partially offset by an increase in loans held-for-portfolio. The increase from one year ago was primarily a result of increases in loans held-for-portfolio, investment securities, and BOLI, partially offset by lower balances in cash and cash equivalents and a decrease in loans held-for-sale.

Cash and cash equivalents decreased $117.0 million, or 59.4%, to $80.1 million at June 30, 2022, compared to $197.1 million at March 31, 2022, and decreased $156.8 million, or 66.2%, from $236.8 million at June 30, 2021. The decrease from the prior quarter-end was primarily due to the redeployment of excess liquidity into higher yielding loans, and to a lesser extent, to fund a decrease in deposits, primarily related to decreases in lawyer trust accounts and public funds. The decrease from one year ago was due to deploying cash earning a nominal yield into higher interest-earning loans and, to a much lesser extent, investments securities.

Investment securities decreased $849 thousand, or 6.8%, to $11.6 million at June 30, 2022, compared to $12.4 million at March 31, 2022, and increased $4.1 million, or 54.1%, from $7.5 million at June 30, 2021. Held-to-maturity securities totaled $2.2 million at both June 30, 2022 and March 31, 2022, and totaled none at June 30, 2021. Available-for-sale securities totaled $9.4 million at June 30, 2022, compared to $10.2 million at March 31, 2022, and $7.5 million at June 30, 2021. The decrease in available-for-sale securities from the prior quarter was primarily due to higher net unrealized losses resulting from the increases in market interest rates during the year and regularly scheduled payments. The increase from the same period one year ago was primarily due to investment purchases throughout the previous year, partially offset by calls of securities and regularly scheduled payments and maturities.

Loans held-for-sale totaled $100 thousand at June 30, 2022, compared to $1.3 million at March 31, 2022 and $3.7 million at June 30, 2021. The decreases were primarily due to a decline in mortgage originations reflecting reduced refinance activity.

Loans held-for-portfolio increased to $806.1 million at June 30, 2022, compared to $709.5 million at March 31, 2022 and increased from $639.6 million at June 30, 2021. The increase in loans held-for-portfolio at June 30, 2022, compared to the prior quarter and one year ago, primarily resulted from increases across all loan categories, excluding commercial business loans which decreased between the periods due primarily to PPP loan SBA loan forgiveness payments. The increase in loans held-for-portfolio primarily resulted from focused marketing campaigns, increased utilization of digital marketing tools, and the addition of experienced lending staff during 2021, as well as United States Department of Agriculture guaranteed loan purchases of $6.8 million during the second six months of 2021 and the first six months of 2022.

Nonperforming assets ("NPAs"), which are comprised of nonaccrual loans, including nonperforming troubled debt restructurings ("TDRs"), other real estate owned ("OREO"), and other repossessed assets, decreased $238 thousand, or 4.4%, to $5.2 million at June 30, 2022, from $5.4 million at March 31, 2022 and increased $3.0 million, or 140.3% from $2.2 million at June 30, 2021. The decrease in nonperforming assets during the current quarter compared to the prior quarter primarily was due to the pay-off of a $170 thousand nonperforming commercial business loan during the period. Loans classified as TDRs totaled $2.0 million, $2.3 million and $2.6 million at June 30, 2022, March 31, 2022 and June 30, 2021, respectively, of which $128 thousand, $273 thousand and $424 thousand, respectively, were on not performing pursuant to their contractual repayment terms at those dates.

NPAs to total assets were 0.55%, 0.56% and 0.23% at June 30, 2022, March 31, 2022 and June 30, 2021, respectively. The allowance for loan losses to total loans outstanding was 0.88%, 0.90% and 0.96% at June 30, 2022, March 31, 2022 and June 30, 2021, respectively. Excluding PPP loans of $429 thousand which are 100% guaranteed by the SBA, the allowance for loan losses totaled 0.88% of total loans outstanding at June 30, 2022, compared to 0.91% of total loans outstanding at March 31, 2022, excluding PPP loans of $2.1 million, and 1.02% of total loans outstanding at June 30, 2021, excluding PPP loans of $36.0 million (See Non-GAAP reconciliation on page 14). Net loan recoveries during the second quarter of 2022 totaled $110 thousand compared to net charge-offs of $24 thousand for the first quarter of 2022, and net charge-offs of $28 thousand for the second quarter of 2021.

The following table summarizes our NPAs (dollars in thousands):

	June 30, 2022			March 31, 2022			December 31, 2021			September 30, 2021			June 30, 2021
Nonperforming Loans:
One-to-four family	$	1,669		$	1,676		$	2,207		$	1,915		$	457
Home equity loans		152			155			140			150			157
Commercial and multifamily		2,307			2,336			2,380			—			—
Construction and land		30			31			33			220			39
Manufactured homes		117			135			122			98			143
Floating homes		—			—			493			504			510
Commercial business		—			170			176			182			186
Other consumer		233			244			—			—			—
Total nonperforming loans		4,509			4,747			5,552			3,069			1,492
OREO and Other Repossessed Assets:
One-to-four family		84			84			84			84			84
Commercial and multifamily		575			575			575			575			575
Total OREO and repossessed assets		659			659			659			659			659
Total nonperforming assets	$	5,168		$	5,406		$	6,211		$	3,728		$	2,151

Nonperforming Loans:
One-to-four family		32.3	%		31.0	%		35.5	%		51.4	%		21.2	%
Home equity loans		2.9			2.9			2.3			4.0			7.3
Commercial and multifamily		44.7			43.2			38.3			—			—
Construction and land		0.6			0.6			0.5			5.9			1.8
Manufactured homes		2.3			2.5			2.0			2.6			6.6
Floating homes		—			—			7.9			13.5			23.8
Commercial business		—			3.1			2.8			4.9			8.6
Other consumer		4.5			4.5			—			—			—
Total nonperforming loans		87.3			87.8			89.3			82.3			69.4
OREO and Other Repossessed Assets:
One-to-four family		1.6			1.6			1.4			2.3			3.9
Commercial and multifamily		11.1			10.6			9.3			15.4			26.7
Total OREO and repossessed assets		12.7			12.2			10.7			17.7			30.6
Total nonperforming assets		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%

The following table summarizes the allowance for loan losses (dollars in thousands, unaudited):

	For the Quarter Ended:
	June 30, 2022			March 31, 2022			December 31, 2021			September 30, 2021			June 30, 2021
Allowance for Loan Losses
Balance at beginning of period	$	6,407		$	6,306		$	6,327		$	6,157		$	5,935
Provision for loan losses during the period		600			125			—			175			250
Net recoveries/(charge-offs) during the period		110			(24	)		(21	)		(5	)		(28	)
Balance at end of period	$	7,117		$	6,407		$	6,306		$	6,327		$	6,157
Allowance for loan losses to total loans		0.88	%		0.90	%		0.92	%		0.95	%		0.96	%
Allowance for loan losses to total loans (excluding PPP loans)⁽¹⁾		0.88	%		0.91	%		0.92	%		0.96	%		1.02	%
Allowance for loan losses to total nonperforming loans		157.84	%		134.97	%		113.58	%		206.16	%		412.67	%

(1) Represents a non-GAAP financial measure. See Non-GAAP Financial Measures at the end of this earnings release for a reconciliation of our non-GAAP measures to the most directly comparable GAAP financial measure.

Deposits decreased $50.1 million, or 6.0%, to $786.0 million at June 30, 2022, compared to $836.1 million at March 31, 2022 and decreased $18.7 million, or 2.3%, from $804.7 million at June 30, 2021. The decrease in deposits compared to the prior quarter was primarily a result of a managed run-off of public funds, the expected outflow of temporary deposits from lawyer trust accounts, and a seasonal decrease in specialty business accounts. The decrease in deposits compared to the year ago quarter was primarily a result of a managed run-off of higher costing maturing certificates of deposits, partially offset by higher balances in all other deposit accounts. Our noninterest-bearing deposits decreased $22.2 million, or 10.6% to $186.6 million at June 30, 2022, compared to $208.8 million at March 31, 2022 and increased $4.8 million, or 2.6% from $181.8 million at June 30, 2021. Noninterest-bearing deposits represented 23.7%, 25.0% and 22.6% of total deposits at June 30, 2022, March 31, 2022 and June 30, 2021, respectively.

There were $30.0 million of outstanding FHLB term advances at June 30, 2022, and no outstanding FHLB advances at March 31, 2022 and June 30, 2021. Subordinated notes, net totaled $11.7 million at each of June 30, 2022, March 31, 2022 and June 30, 2021.

Stockholders' equity totaled $93.1 million at June 30, 2022, a decrease of $793 thousand, or 0.8%, from $93.9 million at March 31, 2022, and an increase of $3.5 million, or 3.9%, from $89.5 million at June 30, 2021. The decrease in stockholders' equity from March 31, 2022 was primarily the result of the repurchase of $1.6 million of Company common stock, the payment of $444 thousand in dividends to Company stockholders and a $480 thousand increase in accumulated other comprehensive loss, net of tax, resulting from the effects of higher interest rates on the market value of our available-for-sale securities, partially offset by $1.6 million of net income earned during the current quarter.

Sound Financial Bancorp, Inc., a bank holding company, is the parent company of Sound Community Bank, and is headquartered in Seattle, Washington with full-service branches in Seattle, Tacoma, Mountlake Terrace, Sequim, Port Angeles, Port Ludlow and University Place. Sound Community Bank is a Fannie Mae Approved Lender and Seller/Servicer with one Loan Production Office located in the Madison Park neighborhood of Seattle, Washington. For more information, please visit www.soundcb.com.

Forward Looking Statement Disclaimer

When used in filings by Sound Financial Bancorp, Inc. (the "Company") with the Securities and Exchange Commission (the "SEC"), in the Company's press releases or other public or stockholder communications, and in oral statements made with the approval of an authorized executive officer, the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project," "intends" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements, which are based on various underlying assumptions and expectations and are subject to risks, uncertainties and other unknown factors, may include projections of our future financial performance based on our growth strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events, and may turn out to be wrong because of inaccurate assumptions we might make, because of the factors illustrated below or because of other important factors that we cannot foresee that could cause our actual results to be materially different from the historical results or from any future results expressed or implied by such forward-looking statements.

Factors which could cause actual results to differ materially, include, but are not limited to: potential adverse impacts to economic conditions in the Company's local market areas, other markets where the Company has lending relationships, or other aspects of the Company's business operations or financial markets, generally, resulting from the COVID-19 pandemic and any governmental or societal responses thereto; changes in consumer spending, borrowing and savings habits; changes in economic conditions, either nationally or in our market area, including as a result of employment levels and labor shortages, and the effects of inflation, a potential recession or slowed economic growth caused by increasing oil prices and supply chain disruptions; fluctuations in interest rates; the risks of lending and investing activities, including changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses; the Company's ability to access cost-effective funding; fluctuations in real estate values and both residential and commercial real estate market conditions; demand for loans and deposits in the Company's market area; secondary market conditions for loans; results of examinations of the Company or its wholly owned bank subsidiary by their regulators; increased competition; changes in management's business strategies; legislative changes; changes in the regulatory and tax environments in which the Company operates; and other factors described in the Company's latest annual Report on Form 10-K and Quarterly Reports on Form 10-Q and other filings with the Securities and Exchange Commission – which are available at www.soundcb.com and on the SEC's website at www.sec.gov.

Any of the forward-looking statements that the Company makes in this press release and in the other public statements are based upon management's beliefs and assumptions at the time they are made and may turn out to be incorrect because of the inaccurate assumptions the Company might make, because of the factors illustrated above or because of other factors that cannot be foreseen by the Company. Therefore, these factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements. The Company does not undertake and specifically disclaims any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. These risks could cause the Company's actual results for 2022 and beyond to differ materially from those expressed in any forward-looking statements made by, or on behalf of the Company and could negatively affect its operating and stock performance.

CONSOLIDATED INCOME STATEMENTS

(Dollars in thousands, unaudited)

	For the Quarter Ended
	June 30, 2022			March 31, 2022		December 31, 2021			September 30, 2021			June 30, 2021
Interest income	$	8,986		$	8,213	$	8,359		$	9,102		$	8,415
Interest expense		594			595		643			785			1,064
Net interest income		8,392			7,618		7,716			8,317			7,351
Provision for loan losses		600			125		—			175			250
Net interest income after provision for loan losses		7,792			7,493		7,716			8,142			7,101
Noninterest income:
Service charges and fee income		596			549		632			556			526
(Loss) earnings on cash surrender value of bank-owned life insurance		(35	)		21		135			104			96
Mortgage servicing income		313			320		323			328			321
Fair value adjustment on mortgage servicing rights		57			268		(114	)		(125	)		(294	)
Net gain on sale of loans		84			365		507			568			1,063
Total noninterest income		1,015			1,523		1,483			1,431			1,712
Noninterest expense:
Salaries and benefits		3,969			4,167		3,786			3,512			3,314
Operations		1,428			1,314		1,732			1,466			1,361
Regulatory assessments		99			101		96			91			91
Occupancy		439			432		451			441			409
Data processing		849			821		863			808			813
Total noninterest expense		6,784			6,835		6,928			6,318			5,988
Income before provision for income taxes		2,023			2,181		2,271			3,255			2,825
Provision for income taxes		409			458		407			663			574
Net income	$	1,614		$	1,723	$	1,864		$	2,592		$	2,251

CONSOLIDATED INCOME STATEMENTS

(Dollars in thousands, unaudited)

	For the Six Months Ended June 30,
		2022			2021
Interest income	$	17,199		$	16,413
Interest expense		1,189			2,526
Net interest income		16,010			13,887
Provision for loan losses		725			250
Net interest income after provision for loan losses		15,285			13,637
Noninterest income:
Service charges and fee income		1,146			1,059
(Loss) earnings on cash surrender value of bank-owned life insurance		(14	)		178
Mortgage servicing income		633			633
Fair value adjustment on mortgage servicing rights		325			(569	)
Net gain on sale of loans		450			3,116
Total noninterest income		2,540			4,417
Noninterest expense:
Salaries and benefits		8,137			6,958
Operations		2,743			2,567
Regulatory assessments		200			192
Occupancy		872			857
Data processing		1,670			1,593
Net gain on OREO and repossessed assets		—			(16	)
Total noninterest expense		13,622			12,151
Income before provision for income taxes		4,203			5,903
Provision for income taxes		867			1,201
Net income	$	3,336		$	4,702

CONSOLIDATED BALANCE SHEET

(Dollars in thousands, unaudited)

	June 30, 2022			March 31, 2022			December 31, 2021			September 30, 2021			June 30, 2021
ASSETS
Cash and cash equivalents	$	80,051		$	197,091		$	183,590		$	206,702		$	236,815
Available-for-sale securities, at fair value		9,382			10,223			8,419			7,060			7,524
Held-to-maturity securities, at amortized cost		2,215			2,223			—			—			—
Loans held-for-sale		100			1,297			3,094			3,884			3,674
Loans held-for-portfolio		806,078			709,485			686,398			667,551			639,633
Allowance for loan losses		(7,117	)		(6,407	)		(6,306	)		(6,327	)		(6,157	)
Total loans held-for-portfolio, net		798,961			703,078			680,092			661,224			633,476
Accrued interest receivable		2,350			2,117			2,217			2,231			2,078
Bank-owned life insurance, net		21,081			21,116			21,095			20,926			17,823
Other real estate owned ("OREO") and other repossessed assets, net		659			659			659			659			659
Mortgage servicing rights, at fair value		4,754			4,668			4,273			4,211			4,151
Federal Home Loan Bank ("FHLB") stock, at cost		2,317			1,117			1,046			1,052			1,052
Premises and equipment, net		5,632			5,730			5,819			5,941			6,043
Right-of-use assets		5,548			5,777			5,811			6,033			6,255
Other assets		3,954			3,758			3,576			8,188			3,628
TOTAL ASSETS	$	937,004		$	958,854		$	919,691		$	928,111		$	923,178
LIABILITIES
Interest-bearing deposits	$	599,377		$	627,323		$	607,854		$	612,805		$	622,873
Noninterest-bearing deposits		186,609			208,768			190,466			194,848			181,847
Total deposits		785,986			836,091			798,320			807,653			804,720
Borrowings		30,000			—			—			—			—
Accrued interest payable		194			38			200			48			238
Lease liabilities		5,980			6,211			6,242			6,462			6,681
Other liabilities		9,210			9,169			8,571			8,711			9,453
Advance payments from borrowers for taxes and insurance		922			1,851			1,366			1,708			938
Subordinated notes, net		11,655			11,644			11,634			11,623			11,613
TOTAL LIABILITIES		843,947			865,004			826,333			836,205			833,643
STOCKHOLDERS' EQUITY:
Common stock		26			26			26			26			26
Additional paid-in capital		27,777			28,154			27,956			27,835			27,613
Unearned shares – Employee Stock Ownership Plan ("ESOP")		—			—			—			(28	)		(57	)
Retained earnings		66,203			66,139			65,237			63,905			61,758
Accumulated other comprehensive (loss) income, net of tax		(949	)		(469	)		139			168			195
TOTAL STOCKHOLDERS' EQUITY		93,057			93,850			93,358			91,906			89,535
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	937,004		$	958,854		$	919,691		$	928,111		$	923,178

KEY FINANCIAL RATIOS

(unaudited)

	For the Quarter Ended
	June 30, 2022		March 31, 2022		December 31, 2021		September 30, 2021		June 30, 2021
Annualized return on average assets	0.70	%	0.75	%	0.81	%	1.11	%	0.98	%
Annualized return on average equity	6.86		7.39		7.90		11.21		10.13
Annualized net interest margin⁽¹⁾	3.83		3.49		3.53		3.74		3.36
Annualized efficiency ratio⁽²⁾	72.12	%	74.77	%	75.31	%	64.81	%	66.07	%

(1) Net interest income divided by average interest earning assets.

(2) Noninterest expense divided by total revenue (net interest income and noninterest income).

PER COMMON SHARE DATA

(unaudited)

	At or For the Quarter Ended
	June 30, 2022		March 31, 2022		December 31, 2021		September 30, 2021		June 30, 2021
Basic earnings per share	$	0.62	$	0.66	$	0.72	$	1.00	$	0.87
Diluted earnings per share	$	0.61	$	0.65	$	0.70	$	0.98	$	0.85
Weighted-average basic shares outstanding		2,584,179		2,602,168		2,586,570		2,586,966		2,582,937
Weighted-average diluted shares outstanding		2,615,299		2,640,359		2,631,721		2,633,459		2,627,621
Common shares outstanding at period-end		2,578,595		2,621,531		2,613,768		2,617,425		2,614,329
Book value per share	$	36.09	$	35.80	$	35.72	$	35.11	$	34.25

AVERAGE BALANCE, AVERAGE YIELD EARNED, AND AVERAGE RATE PAID

(Dollars in thousands, unaudited)

The following tables present, for the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. Income and yields on tax-exempt obligations have not been computed on a tax equivalent basis. All average balances are daily average balances. Nonaccrual loans have been included in the table as loans carrying a zero yield for the period they have been on nonaccrual (dollars in thousands).

	Three Months Ended
	June 30, 2022							March 31, 2022							June 30, 2021
	Average Outstanding Balance			Interest Earned/ Paid		Yield/ Rate		Average Outstanding Balance			Interest Earned/ Paid		Yield/ Rate		Average Outstanding Balance			Interest Earned/ Paid		Yield/ Rate
Interest-Earning Assets:
Loans receivable	$	741,626		$	8,697	4.70	%	$	694,920		$	8,075	4.71	%	$	628,144		$	8,299	5.30	%
Investments and interest-bearing cash		136,723			289	0.85	%		189,618			138	0.30	%		249,863			116	0.19	%
Total interest-earning assets	$	878,349		$	8,986	4.10	%	$	884,538		$	8,213	3.77	%	$	878,007		$	8,415	3.84	%
Interest-Bearing Liabilities:
Savings and money market accounts	$	195,339		$	29	0.06	%	$	196,128		$	30	0.06	%	$	166,484		$	38	0.09	%
Demand and NOW accounts		311,941			125	0.16	%		315,181			122	0.16	%		284,952			159	0.22	%
Certificate accounts		95,974			260	1.09	%		102,315			275	1.09	%		174,727			699	1.60	%
Subordinated notes		11,648			168	5.79	%		11,637			168	5.85	%		11,606			168	5.81	%
Borrowings		2,418			12	1.99	%		—			—	—	%		—			—	—	%
Total interest-bearing liabilities	$	617,320			594	0.39	%	$	625,261			595	0.39	%	$	637,769			1,064	0.67	%
Net interest income/spread				$	8,392	3.72	%				$	7,618	3.38	%				$	7,351	3.18	%
Net interest margin						3.83	%						3.49	%						3.36	%

Ratio of interest-earning assets to interest-bearing liabilities		142	%						141	%						138	%
Total deposits	$	796,097		$	414	0.21	%	$	808,180		$	427	0.21	%	$	805,765		$	896	0.45	%
Total funding ⁽¹⁾		810,163			594	0.29	%		819,817			595	0.29	%		817,371			1,064	0.52	%

(1) Total funding is the sum of average interest-bearing liabilities and average noninterest-bearing deposits. The cost of total funding is calculated as annualized total interest expense divided by average total funding.


	Six Months Ended
	June 30, 2022							June 30, 2021
	Average Outstanding Balance			Interest Earned/Paid		Yield/Rate		Average Outstanding Balance			Interest Earned/Paid		Yield/Rate
Interest-Earning Assets:
Loans receivable	$	718,402		$	16,772	4.71	%	$	628,270		$	16,184	5.19	%
Investments and interest-bearing cash		162,304			427	0.53	%		239,733			229	0.19	%
Total interest-earning assets	$	880,706		$	17,199	3.94	%	$	868,003		$	16,413	3.81	%
Interest-Bearing Liabilities:
Savings and money market accounts	$	195,731		$	59	0.06	%	$	161,198		$	102	0.13	%
Demand and NOW accounts		313,552			247	0.16	%		267,019			344	0.26	%
Certificate accounts		99,127			535	1.09	%		194,512			1,744	1.81	%
Subordinated notes		11,643			336	5.82	%		11,601			336	5.84	%
Borrowings		1,215			12	1.99	%		—			—	—	%
Total interest-bearing liabilities	$	621,268			1,189	0.39	%	$	634,330			2,526	0.80	%
Net interest income/spread				$	16,010	3.55	%				$	13,887	3.01	%
Net interest margin						3.67	%						3.23	%

Ratio of interest-earning assets to interest-bearing liabilities		142	%						137	%
Total deposits	$	802,105		$	841	0.21	%	$	793,139		$	2,190	0.56	%
Total funding ⁽¹⁾		814,963			1,189	0.29	%		804,740			2,526	0.63	%

	June 30, 2022			March 31, 2022			December 31, 2021			September 30, 2021			June 30, 2021
Real estate loans:
One-to-four family	$	250,295		$	221,832		$	207,660		$	194,346		$	170,351
Home equity		16,374			13,798			13,250			14,012			15,378
Commercial and multifamily		307,462			279,892			278,175			246,794			244,047
Construction and land		101,394			70,402			63,105			81,576			71,881
Total real estate loans		675,525			585,924			562,190			536,728			501,657
Consumer Loans:
Manufactured homes		23,264			22,179			21,636			21,459			21,032
Floating homes		66,573			59,784			59,268			58,358			43,741
Other consumer		18,076			18,370			16,748			15,732			15,557
Total consumer loans		107,913			100,333			97,652			95,549			80,330
Commercial business loans		24,302			24,452			28,026			36,620			59,969
Total loans		807,740			710,709			687,868			668,897			641,956
Less:
Premiums/(Discounts)		750			788			897			—			—
Deferred fees, net		(2,412	)		(2,012	)		(2,367	)		(1,346	)		(2,323	)
Allowance for loan losses		(7,117	)		(6,407	)		(6,306	)		(6,327	)		(6,157	)
Total loans held for portfolio, net	$	798,961		$	703,078		$	680,092		$	661,224		$	633,476

DEPOSITS

(Dollars in thousands, unaudited)

	June 30, 2022		March 31, 2022		December 31, 2021		September 30, 2021		June 30, 2021
Noninterest-bearing	$	186,609	$	208,768	$	190,466	$	194,848	$	181,847
Interest-bearing		312,439		333,449		307,061		311,303		297,227
Savings		103,311		106,217		103,401		99,747		97,858
Money market		87,672		89,164		91,670		82,314		72,553
Certificates		95,955		98,493		105,722		119,441		155,235
Total deposits	$	785,986	$	836,091	$	798,320	$	807,653	$	804,720

CREDIT QUALITY DATA

(Dollars in thousands, unaudited)

	At or For the Quarter Ended
	June 30, 2022			March 31, 2022			December 31, 2021			September 30, 2021			June 30, 2021
Nonaccrual loans	$	4,381		$	4,474		$	5,130		$	2,658		$	1,068
Nonperforming TDRs		128			273			422			411			424
Total nonperforming loans		4,509			4,747			5,552			3,069			1,492
OREO and other repossessed assets		659			659			659			659			659
Total nonperforming assets	$	5,168		$	5,406		$	6,211		$	3,728		$	2,151
Performing TDRs		1,866			2,072			2,174			2,198			2,221
Net charge-offs during the quarter		110			(24	)		(21	)		(5	)		(28	)
Provision for loan losses during the quarter		600			125			—			175			250
Allowance for loan losses		7,117			6,407			6,306			6,327			6,157
Allowance for loan losses to total loans		0.88	%		0.90	%		0.92	%		0.95	%		0.96	%
Allowance for loan losses to total loans (excluding PPP loans)⁽¹⁾		0.88	%		0.91	%		0.92	%		0.96	%		1.02	%
Allowance for loan losses to total nonperforming loans		157.85	%		134.96	%		113.58	%		206.19	%		412.67	%
Nonperforming loans to total loans		0.56	%		0.67	%		0.81	%		0.46	%		0.23	%
Nonperforming assets to total assets		0.55	%		0.56	%		0.68	%		0.40	%		0.23	%

OTHER STATISTICS

(Dollars in thousands, unaudited)

	At or For the Quarter Ended
	June 30, 2022			March 31, 2022			December 31, 2021			September 30, 2021			June 30, 2021
Sound Community Bank:
Total loans to total deposits		102.77	%		85.00	%		86.16	%		82.82	%		79.77	%
Noninterest-bearing deposits to total deposits		23.74	%		24.97	%		23.86	%		24.13	%		22.60	%
Sound Financial Bancorp, Inc.:
Average total assets for the quarter	$	920,984		$	931,094		$	916,261		$	928,097		$	924,233
Average total equity for the quarter	$	94,397		$	94,497		$	93,569		$	91,766		$	89,139

Non-GAAP Financial Measures

We have presented a non-GAAP financial measure in addition to results presented in accordance with GAAP for the allowance for loan losses to total loans excluding PPP loans. We have presented this non-GAAP financial measure because management believes this non-GAAP measure to be a useful measurement in evaluating the adequacy of the amount of the allowance for loan losses to total loans as the balance of PPP loans, which are guaranteed by the SBA, has been significant to the loan portfolio. This non-GAAP financial measure has inherent limitations and is not required to be uniformly applied. Further, this non-GAAP financial measure should not be considered in isolation or as a substitute for the allowance for loan losses to total loans determined in accordance with GAAP and may not be comparable to similarly titled measures reported by other financial institutions. Reconciliation of the GAAP and non-GAAP financial measurement is presented in the table below.

Non-GAAP Reconciliation

(Dollars in thousands, unaudited)

The following table reconciles the Company's calculation of the allowance for loan losses to period-end loans:

	June 30, 2022			March 31, 2022			December 31, 2021			September 30, 2021			June 30, 2021
Allowance for loan losses	$	(7,117	)	$	(6,407	)	$	(6,306	)	$	(6,327	)	$	(6,157	)

Total loans		806,078			709,485			686,398			667,551			639,633
Less: PPP loans		429			2,105			4,159			11,789			36,043
Total loans, net of PPP loans	$	805,649		$	707,380		$	682,239		$	655,762		$	603,590
Allowance for loan losses to total loans (GAAP)		0.88	%		0.90	%		0.92	%		0.95	%		0.96	%
Allowance for loan losses to total loans, excluding PPP loans (Non-GAAP)		0.88	%		0.91	%		0.92	%		0.96	%		1.02	%

Category: Earnings


Financial:
Wes Ochs
Executive Vice President/CFO
(206) 436-8587

Media:
Laurie Stewart
President/CEO
(206) 436-1495

Sound Financial Bancorp, Inc. Q2 2022 Results